Barack Obama on Sweden

Sweden, on the other hand, had a problem like this. They took over the
banks, nationalized them, got rid of the bad assets, resold the banks
and, a couple years later, they were going again. So you'd think
looking at it, Sweden looks like a good model. Here's the problem;
Sweden had like five banks. [LAUGHS] We've got thousands of banks. You
know, the scale of the U.S. economy and the capital markets are so vast
and the problems in terms of managing and overseeing anything of that
scale, I think, would — our assessment was that it wouldn't make
sense. And we also have different traditions in this country.

A question has been bothering me for some time and I have not seen good explation or information around this. Lets stipulate that most of the banks (90%) have toxic assets on their balance sheets with varying sizes. Lets assume that this prevents them from lending the additional Fed money that they are getting.

Question: Why isn’t the Fed or some private investor starting new banks. Why aren’t new banks with well capitalized balance sheets propping up all over. Theoretically, these banks would be fine from a balance sheet perspective and all we would have to do to get credit flowing is to supply these banks with the money. In the meantime, we would let the bad banks stew, figure out their really issues and go dead/bankrupt?

I suspect that the issue of credit flowing is not simply an issue of banks not having good balance sheets, it also is a function of the fact that the demand for credit has dissipated as consumers have pulled back and are rebuilding their own balance sheets.

But the goal of encouraging new bank creation which theoretically would be safer and sounder should be encouraged? Is their any evidence to see that this is happenning? Are banks being chartered in some corner of the world that we don’t know off and will become the new Citibank? Seems like a great business opportunity to me…

Sorry, no, there shouldn’t be carrots in the “pizza salad”. Shredded cabbage, olive oil, salt and pepper to taste.

Also, one gets the impression that the Swedish government nationalized all or most of the banks. In reality they only took over two, one who was completely bust and closed down immediately, and one who is still partially government owned.

DP, I think you have a point. Although I suppose that to jumpstart new banks, or let other grow very fast, requires a lot of credit, both in the money sense and in the trust sense. And both are hard to get at the moment…

On a timescale of 5 or 10 years, we could probably see this happen, with the Wells Fargo’s and Barclays and smaller unscathed banks taking over the system.

The only players with both cash and trust are governments, and a completely new, government-run financial system to compete with the current one is another step beyond nationalisation…

Speaking of Sweden an how much smaller it is that the USA. I wonder is there any talk out there that the USA economy is just too large a part of the world economy and that (barring free banking, which seems politically impossible)
what we need are 4 or 5 currencies and 4 or 5 federal reserves. With maybe10 or so competing FDICs with all run by the federal government but where if they fail everyone gets fired although the tax payer picks up that expense. Though these would all be under one federal government perhaps they could be made incentive compatible. It seems to me that the FDIC should have threatened to pull the insurance of banks who wrote bad loans of who were too leveraged.

finnsense, the difference between 25% of an economy controlled by central planners and 44% of an economy controlled by central planners is enormous. No damn way do I intend to sit back and let my nation become a socialist hell.

Not sure what you believe really caused “this mess”, as you refer to it. As I see it, the current recession in the U.S. was caused by:

1. a central bank which kept real interest rates below zero from 2002 to 2004, inviting the outrageous borrowing and lending practices of the past few years;

2. the implied government guarantee provided to lenders through Fannie Mae and Freddie Mac, a guarantee which the government did make real rather than implied in 2008;

3. the direction by Congress given to Freddie Mac and Fannie Mae to increase loans to low income borrowers;

4. the second foolish action by the central bank in reducing federal funds rate from 5.25% to 2% between 2007 and 2008 – which led to sharp depreciation of the dollar and meteoric rise in oil prices.

If your argument was that the financial crisis started in the a “free market” economy, then I point to those government interventions above as evidence that the cause was exactly the opposite of the free market.

Considering the population of Sweden in 1992 relative to the population of the US now, that would translate into 4000 banks in the US. That’s surely “thousands of banks”.
(114 / 8692013 * 305788000 = 4011)

cnbc this morning was saying that sweeden has huge exposure to some smaller eu countries and they cut rates 1% overnight. if the problem gets worse there, will sweeden follow the sweedish model this time?

I hope Mr. Obama makes the same considerations of size and scope when comparing the US to Sweden when the subject of nationalized health care re-emerges in a few years. The same problems exist there also.

And much of Europe may want to blame the US but the US is in far better economic condition than most of those developed economies. While our debt is massive and our taxation is a burden, it’s still attractive compared to Germany, UK, Italy, France and Spain. They were on the road to these problems, the economic meltdown just quickened it.

In the nationalisation debate it’s a mistake to consider the “Swedish model†, or any financial solution in isolation from the real economy. From a financial authority perspective, the Swedish solution may have looked neater, more decisive and organised than the Japanese response.

However it was far less effective looked at from the perspective of the wider economy. Swedish GDP per head did not recover pre crisis levels for 5-6 years and subsequently Sweden went from being one of the premier European economies to a middling one in terms of income per head. By contrast Japanese income per head increased throughout the “lost decade†, suggesting whatever a mess was made of the financial sector, the real economy was left relatively unscathed by this dithering.

I always get nervous when people start advocating aspects of the Swedish/Nordic model to Anglosphere countries. (There is quite an intellectual cottage industry down here in Australia doing so.)

The Swedish model grew up in a monocultural society with a relatively narrow geographical range. Which means a high level of
(1) common problems,
(2) common perspectives on those problems,
(3) convergent preferences
(4) communications between officials and citizens.

You can make a highly centralised model work in such circumstances. (How well it will do with lots of culturually different migrants? A very good question, the initial experiences are not hopeful.) The Anglosphere countries are, and always have been, much more socially diverse. Hence the liberal model (using ‘liberal’ in its historical, not weird American, sense) being appropriate to Anglosphere countries.

Indeed, strongly free market economics tends to flourish in culturally diverse countries (the Austrian school and the Danubian monarchy; C18th & C19th Britian-with-Empire, the US) because that people have different preferences is an obvious social fact in such places.

Nationalising banks is a very specific matter, but surely the political trust is not there to do it (perhaps a conservative Republican could get away with it more than a liberal Democrat) in part because Washington does not have a good track record in running businesses. Hardly surprising, since the coordination problems covering a country as geographically, socially and culturally diverse as the US are huge, even without the general problems of public ownership.

I have long thought a big reason why socialism did not get off the ground seriously in the US is precisely because one could not make any plausible case of purposes so common that socialism would even begin to make sense. (Consider the resistance to a unified national health system.)

So, nationalisation as a transitory measure may make a certain amount of sense, but considering how US politics naturally is tends would make it both harder to do at all and harder to do well.

Regarding starting new banks, wouldn’t that be a lot easier of existing bad banks were going bankrupt instead remaining zombie? If starting a new bank is indeed a good investment opportunity, then buying up some branches and infrastructure seems like it’d be a lot faster than building it from scratch.

Nationalisation as a transitory measure may make a certain amount of sense but there’s no reason to believe it’ll have some quick turnaround effect. The assets dragging them down will still be worth diddly squat and the supply problem won’t go away by shifting it to a different balance sheet.

It’s great that we finally have a true intellectual as President, so he can make up facts and pretend to be knowledgeable?

Sweden still has around 120 banks. Some of the smaller banks are part of bank groups, according to this way of measuring Sweden had around 500 banks before the crisis, and somewhat fewer after.

Just like the US Sweden had a few large banks and a bunch of small banks. I don’t want to be petty but Obama is making this (the number of Banks in Sweden as opposed to the US) a central argument. He should get his facts straight, if he wants to be perceived as an intellectual (I guess Obamas followers will worship him like a God-King anyway, regardless of how much economics he gets wrong).

By the way, Sweden responded to it’s crisis by tightening spending, and reducing the deficit, the exact opposite of what Obama wants to do. It lead to a harsh recession and lots of pain, but eventually the economy recovered, and it a much stronger position. Note that the crisis, measured in both unemployment or cumulative negative growth was much worse than the crisis the US is facing (unemployment for example increased by 7 percentage points). President Obama claims the recession risk becoming permanent, which is pure nonsense, and goes against historic evidence and economic theory. Economies always recover from recession, the only question is when and in what shape.
If you want to learn from Sweden also learn the non-leftist policies.

I know perfectly well Obama was making an argument against nationalization. But a factually incorrect pro-market argument is still factually incorrect.

I never called Obama a Marxist or Socialist. He is a Social Democrat, or in American terms a liberal.

2. Barkley:

You are wrong. Only 1 of the large Swedish banks (Nordbanken), by the way already largely owned by the state, was the focus of the bailout. Another large bank was already public (the post bank, PK-Banken). The other bailout bank was Gotabanken, a medium size bank, not one of the large ones. Theother Swedish banks, maybe 10 or so large or medium, and the 100 or so small (most of the later part of a banking group), were never nationalized touched, and ultimately didn’t even get any government money, unlike the US banks.

If you take population into account (the US is 33 times bigger) and GDP (the US has about 25% higher per capita GDP) it’s really not strange that the US should have 5500 banks and Sweden 120.

3. Obama simply does not know what he is talking about in this issue. The fact that you defend him anyway shows the problem: Obama is smart, but not very knowledgeable about economics. He gets an inflated sense of intellect because people like you worship the shadow he walks on. That makes him sound foolish.

People should not make confident statements when they don’t know what they are talking about. Everyone does it to some extent, but that doesn’t make arrogance a good trait. In a President it’s catastrophic.

4.

Regarding the Swedish crisis:

It’s complex. What you mention, and I see you unlike our president have some knowledge of the issue, was part of it, but that goes mostly to monetary policy, not fiscal policy (and no, the breakup of bargaining didn’t cause inflation, inflation is always and everywhere a monetary phenomenon. The central banks response to the breakup of central bargaining caused inflation).

At any case inflation was not a problem at the later stage of the crisis, Sweden had deflation at some point. The problem around say 1993 was a collapse of consumption and investments, with moderate inflation, and ballooning deficit. It’s very close to what we see in the US. The response was choosing the hard way.

Maybe spending ourselves out of the problem would have worked and been less painful. Who knows. But Sweden’s policy worked, and did not lead to any ‘permanent recession’ that Obama claims we risk (an insane claim, by the way, since no economy in the history of the planet has witnesses any such phenomenon).

5. Bush made plenty of idiotic statements. I wrote plenty against him, for example regarding immigration.
Interestingly both of them have the same character flaw, but in different ways. Bush was arrogant (“Bring it on†) and didn’t think he needed to know facts. Obama is arrogant and thinks he can wing it, take some issue he has a shallow knowledge of and pretend to know the details (“Sweden had 5 banks†).

Bush character flaw doomed him. Obama might get away with his, because he has thousands of followers in the media and in academia who dream of following a leader like a flock of sheep, and who care more about politics than facts and reason.
For example, Obamas suggestion of a permanent recession has not met any opposition by academic economist. Because they agree with the idea? Of course not. Every economist has been taught that the economy eventually recovers. They are silent because they like Obama, and are choosing politics before intellectual honesty.

Much of Europe may want to blame the US but the US is in far better economic condition than most of those developed economies. While our debt is massive and our taxation is a burden, it’s still attractive compared to Germany, UK, Italy, France and Spain. They were on the road to these problems, the economic meltdown just quickened it.